2022 Begins with Risk On


Despite 1000s of flights being cancelled over the holiday period, restrictions to economic activity in several major countries and infection rates soaring globally. Investors are optimistic that this Omicron wave will be mild and short-lived. The key in the data is to look at deaths.


After the customary expiry sell-off, markets roared back for a Santa rally that saw new ATHs on SPX. The 4-day melt up over the thin holiday period was quite impressive and found resistance around the large 4800 expiry pin for 31Dec. Now the large gamma position has expired we see the call wall shift higher to 4850 supporting a grind higher, with new vol trigger of 4745 on the downside.


From a sector perspective, we are seeing some of the convergence trade Darius has talked about, where beaten up cyclicals that had be de-risked in early Dec are bouncing harder whilst the defensives are lagging. This dynamic may persist into Jan as more is put back to work and people try to find value in cheaper sectors. Look out for the head fake!


With inflows expected in Jan (GS data) how greedy can we get before the next correction?


VIX got slammed on the Santa rally but MOVE going nowhere. Bond volatility to remain as volatility in economic and inflation data likely. If you’re long risk, you might want to look at some put spreads, given vol collapsed but skew remains quite firm. The quarterly JPM collar trade was rolled into March 4520/3810 put spreads vs 4925 calls, supplying the street with more Vega and helping keep a lid on the VIX.


NFIB Small Business confidence index is recessionary levels as pandemic related support has rolled off, concerns over inflation have risen and spending that was pulled forward due to stimulus checks which had supported DPI have gone, suggesting retail sales have some room to fall back lower now that holiday season has ended.


OIL market still tight, and even as OPEC+ set to increase production, prices are supported. Libya had some supply come offline which may be the reason, but also markets looking past Omicron is helping and a general risk on mood.

Filmed on on Tuesday 4th January 2022.

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